I find it rather funny that Sawant supports rent control when most first year Microeconomics courses will tell you that rent control, like any other binding price ceiling, results in a short term success but a long term deadweight loss and shortage.

And to me the idea of rent control seems so commonplace I am a bit unsure what the upset is about. And while I realize it's not an argument in itself, and indeed wouldn't impress me if someone tried to pawn it off as such, I feel compelled to mention that Kshama Sawant has a Phd in Economics. The case for rent control isn't, as some Seattle based critics for some reason seem to be convinced, "let's be more like San Francsisco" or whatever.
I'll let her make the case herself.
Indeed most of that reddit AMA deals with rent control_________________A cigarette is the perfect type of a perfect pleasure. It is exquisite, and it leaves one unsatisfied. What more can one want? ~Oscar Wilde, The Picture of Dorian Gray

I find it rather funny that Sawant supports rent control when most first year Microeconomics courses will tell you that rent control, like any other binding price ceiling, results in a short term success but a long term deadweight loss and shortage.

Socialism is not a get-out-of-microeconomics-free card. Honest socialists acknowledge dead-weight losses as the cost of an externality not captured in the supply and demand curves for a single commodity. There are usually better ways to incent the desired outcome than the blunt tools of price floors, ceilings, freezes, and control regimes, but these often have some kind of ideological appeal, not to mention being easy to describe.

The best way to build affordable housing is to do it at least half a century ago, and either to cut demand for more housing or minimize time and costs to build new housing. Old and undesirable housing stock goes cheap when housing quantity demanded isn't outpacing supply. That happens when people are not immigrating on net (see: rust belt), and also when there are plenty of available buildable lots, permitting time is short, and development fees aren't high (see: midwest), so developers, being generally an optimistic bunch, can rapidly build to meet demand.

It doesn't matter if developers are making pricey new housing, or cheap new housing, as long as the quantities supplied are lined up with the quantities demanded. Buyers and renters will sort themselves according to what they're willing to pay, while sellers and landlords will price according to what they can get. The reason it doesn't matter if developers concentrate on the high end of the market when relative quantitiies demanded and supplied don't change is, the pricey new housing draws the well-heeled away from now slightly less desirable housing, meaning that housing is likely to be repriced to draw the slightly less well-heeled, with a ripple effect down the market, until it meets up with what the newcomers to the market are willing to pay for some existing housing. There's not much incentive for developers to target the low end of the market, since that can push prices at that end even lower as landlords and sellers use pricing to draw tenants out of higher-priced units until the market's newcomers find housing at a quality and price they like.

One common theme in Sawant's discussion in the AMA is that it's large corporate developers that are pushing up prices, and that's who should be targeted by pricing limits. Actually, it's not the large corporate-ness of the developers that give them pricing power. The reason you get large corporate developers creating most of the new housing in a market is because it's constrained - there's not a lot of buildable land, permitting processes are long, and developer fees are high. That means that development ties up large amounts of capital for a long time before it can see any return. Only the deepest pockets can afford to develop in markets like that - small players are priced out.

The long lead-time on development also means that the quantity supplied has trouble keeping up with the quantity demanded. This is where price increases come from; it doesn't matter in the least who's doing the developing if there aren't as many places to live as people who want them. Tenants and buyers will bid against each other until they find a place, pushing prices up all across the market, including at the low end, possibly pricing those tenants out of the market.

The other effect of a constrained supply is that the low end housing becomes a prime target for gentrification. Developers naturally gravitate to properties with high potential returns, which in markets without vacant land means redevelopment of old housing stock in otherwise desirable locations. This wouldn't matter that much if supplies were outpacing demand, because the new expensive housing would have the effect of pushing other housing down in price to compete for tenants, so there'd eventually be some other roughly equally cheap housing available. In tightening markets, though, it gives the impression of adding insult to injury, kicking poor people to the curb so the yuppies have a new place to park their Teslas.

Seattle is definitely on the constrained end of things - vacant land is way out in the sticks, local permitting from purchase to sale can take a couple of years and run anywhere from 2.5% to 12% of the final cost, and impact fees for roads, schools, parks, and fire protection, as well as utility hook-up fees, can be well above $10,000 per unit. Higher density infill is officially encouraged, but is often opposed by neighbors, who regularly try to kill development permits; they usually fail but not before running up developer costs. It should be no surprise that housing is getting less affordable here overall as development fails to keep pace with housing demand.

So, what would happen if pricing controls were tossed into the mix? One easy to predict first-order effect is that even less new housing would be developed than would otherwise be the case. Capital flees uncertainty, and the uncertainty of a return on housing development in Seattle means that money would head for the suburbs. We'd wind up with some lucky tenants paying below-market rents, and some unlucky tenants with above-market rents and nasty commutes. Landlords would invest in their housing stock at levels appropriate to the return they were getting, not at the levels they'd pay for upkeep on properties earning a market return (read: maintenance would suck). People wouldn't move out of rent-controlled housing even if they otherwise might, due to a changed job or family situation, because of the cost. There are fine examples of how rent controls are perversely driving out the poor in New York and San Francisco, as the constrained, unregulated market's relative overpricing compared to the controlled market raises the cost of living overall while incenting landlords to get out of the business.

Sawant repeatedly excoriates price-gouging real-estate speculators for building pricey housing for the well-to-do and reducing the stock of affordable housing. She denies that increasing the supply of housing will make a difference if it's all expensive housing that's built. It doesn't matter! As long as a property is substantially more valuable rented than vacant, prices will move down to find takers when more housing is on offer than there are people to fill it. It won't necessarily be those shiny new high-rise condos downtown that become affordable, but the ripple effect will reach the mother-in-law apartments in the north end that the poor can actually afford.

Sawant's assertion that the controlled market failures (see: New York, San Francisco) were due to only partial control doesn't really make a difference, either. Even if every rental unit in Seattle was price-controlled, the prices at the borders, in Shoreline and Tukwila, and across the water on the Eastside, would all rise, and the effect would be the same in the end - less housing for rent in Seattle, less new construction, leading to less affordable housing overall, and less mobility.

Sawant also calls for even higher permitting and impact fees and spending the money on improved mass transit. How that helps with affordability is anyone's guess. Another perverse effect of increasing fixed-route transit is that prices for properties close to transit centers tend to rise, while those further away fall, at least in relative terms. In other words, taking light rail to the people who need it makes them move away.

So, what does work, if rent controls don't? Speed. In a word, that's what gets more developers to the party. If the time between the purchase of a couple of adjacent teardown lots and tenants moving into a new twelve-unit apartment is brought down well under a year, then smaller developers can afford to get into the market, not just the behemoths. More price points can be represented in new construction (not that it matters for affordability overall). The length of time capital is tied up in red tape matters more than a lot of the other costs, when you consider that how closely supply follows changes in demand is the major determinant in rental price swings.

The nimby neighbors won't like that one bit._________________The reward for a good life is a good life.

Socialism is not a get-out-of-microeconomics-free card. Honest socialists acknowledge dead-weight losses as the cost of an externality not captured in the supply and demand curves for a single commodity. There are usually better ways to incent the desired outcome than the blunt tools of price floors, ceilings, freezes, and control regimes, but these often have some kind of ideological appeal, not to mention being easy to describe.

The best way to build affordable housing is to do it at least half a century ago, and either to cut demand for more housing or minimize time and costs to build new housing. Old and undesirable housing stock goes cheap when housing quantity demanded isn't outpacing supply. That happens when people are not immigrating on net (see: rust belt), and also when there are plenty of available buildable lots, permitting time is short, and development fees aren't high (see: midwest), so developers, being generally an optimistic bunch, can rapidly build to meet demand.

It doesn't matter if developers are making pricey new housing, or cheap new housing, as long as the quantities supplied are lined up with the quantities demanded. Buyers and renters will sort themselves according to what they're willing to pay, while sellers and landlords will price according to what they can get.

Indeed, and that would be the problem, not the solution. I'm not sure what world you are living in, but where I am those policies have resulted in skyrocketing rents and gentrification. Oh and ever been to Spain? I have. De-regulating the housing market worked out great there.

Quote:

The reason it doesn't matter if developers concentrate on the high end of the market when relative quantitiies demanded and supplied don't change is, the pricey new housing draws the well-heeled away from now slightly less desirable housing, meaning that housing is likely to be repriced to draw the slightly less well-heeled, with a ripple effect down the market, until it meets up with what the newcomers to the market are willing to pay for some existing housing. There's not much incentive for developers to target the low end of the market, since that can push prices at that end even lower as landlords and sellers use pricing to draw tenants out of higher-priced units until the market's newcomers find housing at a quality and price they like.

That's a nice theory.

Quote:

One common theme in Sawant's discussion in the AMA is that it's large corporate developers that are pushing up prices, and that's who should be targeted by pricing limits. Actually, it's not the large corporate-ness of the developers that give them pricing power. The reason you get large corporate developers creating most of the new housing in a market is because it's constrained - there's not a lot of buildable land, permitting processes are long, and developer fees are high. That means that development ties up large amounts of capital for a long time before it can see any return. Only the deepest pockets can afford to develop in markets like that - small players are priced out.

The long lead-time on development also means that the quantity supplied has trouble keeping up with the quantity demanded. This is where price increases come from; it doesn't matter in the least who's doing the developing if there aren't as many places to live as people who want them. Tenants and buyers will bid against each other until they find a place, pushing prices up all across the market, including at the low end, possibly pricing those tenants out of the market.

The other effect of a constrained supply is that the low end housing becomes a prime target for gentrification. Developers naturally gravitate to properties with high potential returns, which in markets without vacant land means redevelopment of old housing stock in otherwise desirable locations. This wouldn't matter that much if supplies were outpacing demand, because the new expensive housing would have the effect of pushing other housing down in price to compete for tenants, so there'd eventually be some other roughly equally cheap housing available. In tightening markets, though, it gives the impression of adding insult to injury, kicking poor people to the curb so the yuppies have a new place to park their Teslas.

Seattle is definitely on the constrained end of things - vacant land is way out in the sticks, local permitting from purchase to sale can take a couple of years and run anywhere from 2.5% to 12% of the final cost, and impact fees for roads, schools, parks, and fire protection, as well as utility hook-up fees, can be well above $10,000 per unit. Higher density infill is officially encouraged, but is often opposed by neighbors, who regularly try to kill development permits; they usually fail but not before running up developer costs. It should be no surprise that housing is getting less affordable here overall as development fails to keep pace with housing demand.

So, what would happen if pricing controls were tossed into the mix? One easy to predict first-order effect is that even less new housing would be developed than would otherwise be the case. Capital flees uncertainty, and the uncertainty of a return on housing development in Seattle means that money would head for the suburbs. We'd wind up with some lucky tenants paying below-market rents, and some unlucky tenants with above-market rents and nasty commutes. Landlords would invest in their housing stock at levels appropriate to the return they were getting, not at the levels they'd pay for upkeep on properties earning a market return (read: maintenance would suck). People wouldn't move out of rent-controlled housing even if they otherwise might, due to a changed job or family situation, because of the cost. There are fine examples of how rent controls are perversely driving out the poor in New York and San Francisco, as the constrained, unregulated market's relative overpricing compared to the controlled market raises the cost of living overall while incenting landlords to get out of the business.

Sawant repeatedly excoriates price-gouging real-estate speculators for building pricey housing for the well-to-do and reducing the stock of affordable housing. She denies that increasing the supply of housing will make a difference if it's all expensive housing that's built. It doesn't matter! As long as a property is substantially more valuable rented than vacant, prices will move down to find takers when more housing is on offer than there are people to fill it. It won't necessarily be those shiny new high-rise condos downtown that become affordable, but the ripple effect will reach the mother-in-law apartments in the north end that the poor can actually afford.

Sawant's assertion that the controlled market failures (see: New York, San Francisco) were due to only partial control doesn't really make a difference, either. Even if every rental unit in Seattle was price-controlled, the prices at the borders, in Shoreline and Tukwila, and across the water on the Eastside, would all rise, and the effect would be the same in the end - less housing for rent in Seattle, less new construction, leading to less affordable housing overall, and less mobility.

Sawant also calls for even higher permitting and impact fees and spending the money on improved mass transit. How that helps with affordability is anyone's guess. Another perverse effect of increasing fixed-route transit is that prices for properties close to transit centers tend to rise, while those further away fall, at least in relative terms. In other words, taking light rail to the people who need it makes them move away.

So, what does work, if rent controls don't? Speed. In a word, that's what gets more developers to the party. If the time between the purchase of a couple of adjacent teardown lots and tenants moving into a new twelve-unit apartment is brought down well under a year, then smaller developers can afford to get into the market, not just the behemoths. More price points can be represented in new construction (not that it matters for affordability overall). The length of time capital is tied up in red tape matters more than a lot of the other costs, when you consider that how closely supply follows changes in demand is the major determinant in rental price swings.

The nimby neighbors won't like that one bit.

And where exactly is this magical world of naturally lowering prices? See it is a nice theory, that deregulating leads to cheaper housing, but as you say affordable housing really has very little incentive to be built by developers. Instead the most poorly maintained houses at any given time becomes the "affordable" housing after all low-income people are less likely to complain and thus that is the easiest way for developers to turn a profit. Of course, you can't have such affordable housing taking up lucrative spots in the city center and thus you have a process in the U.S where, just like in Sweden, the poor are driven out. And yes, the benevolence of the market means investment in transit can raise prices...hence the argument for rent control. Of course the only sustainable solution for affordable housings, sans your fantasy "ripple effect", is direct public investment._________________A cigarette is the perfect type of a perfect pleasure. It is exquisite, and it leaves one unsatisfied. What more can one want? ~Oscar Wilde, The Picture of Dorian Gray

Just wanted to point out that the major problem with housing in Hong Kong is physical lack of space. Hong Kong has an average population density of 6,544/km^2, compared to the US's paltry 34.2/km^2. Kowloon has a density of 43,033/km^2, compared to LA with a density of 3,176/km^2.

There is literally no more space to build._________________Whatever happened to the heroes?

It's easy to find places where housing prices are naturally dropping overall. Look for places with net emigration. If it's been abandoned wholesale like Detroit, you'll find houses on offer for the price of the property taxes and transfer fees. There is only one surefire way to make the price of housing come down, and that is to oversupply it. Like I said, the best way to build low-income housing is to do it fifty to a hundred years ago. The most effective way to keep housing prices stable is to match the quantity demanded with the quantity supplied.

I'm happy to concede that there's a lag in repricing downward when more housing supply shows up, longer than the practically negligible delay in repricing upward when more potential tenants arrive. That's due to the natural tendency toward denial that the world has changed to your detriment. When demand for your rental units has fallen off, you may leave your prices alone and sit on empty inventory for a month or even two, hoping that the change is temporary, before you concede that you've got to move to where the market is. Behavioral economics is fully at play here. It doesn't take too long, though, because it's tough to make up a lost month of rent.

I didn't address the effects of unwinding a price-control regime, since that wasn't what Sawant was arguing, but I'm sure it would be nothing but a horror-show from the perspective of the former lucky beneficiaries of below-market-rate housing. How could it be otherwise? It's not an argument for or against imposing price controls in the first place. The question to ask there is whether eliminating price controls has social benefits overall, taking both the winners and losers into account. Maybe you think that higher rents for a poor tenant represent a bigger social cost than the social benefits of increased rents going to landlords. A dollar has a much higher utility for someone earning the minimum wage than it does for a millionaire, after all. But what if you add in the social benefit of more housing being created in the unregulated environment than was created under price controls? The social benefit to previously unlucky potential tenants now able to find a place they can afford? The social benefit of labor mobility? The social benefits of dynamic redevelopment of the city in ways that are impossible when land use is fixed? It's not that easy to say it's a bad idea in every case, or even in many cases.

How the regime is unwound can make a big difference, too. Dropping it like a hot potato after years of market-distorting effects is likely to have the worst possible repercussions. Spinning up an unregulated development environment while tapering controls, so that by the end, supply is available to meet the anticipated demand, can cut the rent shock effect.

Housing is not a commodity the way barrels of oil or bushels of wheat are commodities. Those are essentially interchangeable, modulo shipping costs. The market comes to a single price for them at any given time, for all buyers and sellers, where the quantity demanded matches the quantity supplied. Housing is a matchmaking market, with goods in fixed locations and of varying quality. Sellers (developers, landlords) must bid for buyer's business with the goods they have on hand. Desirable properties get higher prices, while undesirable ones get low prices, as purchasers and tenants sort themselves out according to how they want to live, where they want to be, and what they are willing to pay. When more buyers show up than sellers have inventory, the ones willing to pay the least will leave the market empty-handed, or in this case, unhoused. When more inventory exists than there are buyers to live in it, landlords must compete for tenant business with lower pricing, since they can't do much about location or quality, at least in the short run. There will be some housing that sits vacant, spread across all price points, where no buyer was found to match its particular trade-offs of price, quality, and location.

IT all comes down to quantities. The scissors of supply and demand in Fritterdonut's chart tell the story, albeit for fungible commodities rather than matchmaking ones. When prices are artificially lowered by controls, you find more takers than sellers at every price point. Landlords and developers are coerced into giving up some of the value that their properties provide to the buying market as a whole, and they respond by supplying fewer of them. I hope this doesn't come as a surprise. Purchasers and tenants know a good deal when they see one, and they will oversubscribe the inventory at the artificial prices by more than they would at market clearing prices. In other words, new potential tenants will try to enter the bottom of the market when it looks like there are now housing units in their price range, only to find that there are none to be had. A lucky few will get a deal. The rest will go back to mom's basement. Those willing to pay more who would have found a deal in the unregulated market might luck into a better deal (quality, location) at their price, or they might have to move outside the regulated market, where they will find their money buys less quality along with a worse commute at the price they can afford. Price controls divide purchasers into the lucky and the unlucky, and turn all the controlled suppliers into the unlucky while suppliers just outside the regime see some benefit.

So maybe I should be in favor of rent controls in Seattle. After all, I own a house on the Eastside. Its value will almost certainly go up. Lucky me!_________________The reward for a good life is a good life.

Detroit is halfway across the country from say, seattle. The up-front cost of a move there may well prove insurmountable for someone who is unable to afford even a shitty cheap place in seattle. Not a very good comparison._________________

Just wanted to point out that the major problem with housing in Hong Kong is physical lack of space. Hong Kong has an average population density of 6,544/km^2, compared to the US's paltry 34.2/km^2. Kowloon has a density of 43,033/km^2, compared to LA with a density of 3,176/km^2.

There is literally no more space to build.

If that is what you see as the "major problem" in the Hong Kong housing market I think we must have a different definition of that word. Personally I see people paying overprices to live in cages as a problem, while real-estate investors build luxury housing...but like I said we must see what constitutes a "major problem" quite differently.

Usagi:
It's like you didn't read a single word of what I said also your idea of how the housing makret works is positively removed from any semblance of reality. Try observing a real population living under real unregulated rents. Also your entire supposed positive outcome is entirely based on the assumption that it is red tape that keeps developers from building en masse (and furthermore this also hinges on the belief that this will somehow maybe by extention create affordable housing)._________________A cigarette is the perfect type of a perfect pleasure. It is exquisite, and it leaves one unsatisfied. What more can one want? ~Oscar Wilde, The Picture of Dorian Gray

Just wanted to point out that the major problem with housing in Hong Kong is physical lack of space. Hong Kong has an average population density of 6,544/km^2, compared to the US's paltry 34.2/km^2. Kowloon has a density of 43,033/km^2, compared to LA with a density of 3,176/km^2.

There is literally no more space to build.

If that is what you see as the "major problem" in the Hong Kong housing market I think we must have a different definition of that word. Personally I see people paying overprices to live in cages as a problem, while real-estate investors build luxury housing...but like I said we must see what constitutes a "major problem" quite differently.

Developers have little incentive to lose money by making comfortable, affordable housing because density (and thus demand) has driven up the price per square foot to ridiculous levels.

Those apartments sold out within 7 hours, at a price of almost $3000 (~HK22,000) per square foot. That's about 2.5x more than space in NYC. And it still sells out in hours._________________Whatever happened to the heroes?

Just wanted to point out that the major problem with housing in Hong Kong is physical lack of space. Hong Kong has an average population density of 6,544/km^2, compared to the US's paltry 34.2/km^2. Kowloon has a density of 43,033/km^2, compared to LA with a density of 3,176/km^2.

There is literally no more space to build.

If that is what you see as the "major problem" in the Hong Kong housing market I think we must have a different definition of that word. Personally I see people paying overprices to live in cages as a problem, while real-estate investors build luxury housing...but like I said we must see what constitutes a "major problem" quite differently.

Developers have little incentive to lose money by making comfortable, affordable housing because density (and thus demand) has driven up the price per square foot to ridiculous levels.

Those apartments sold out within 7 hours, at a price of almost $3000 (~HK22,000) per square foot. That's about 2.5x more than space in NYC. And it still sells out in hours.

Exactly. The market has no incentive not to let the poor live in shantytowns in one of the richest areas of the world. Forgive me, but I thought we were having a discussion about affordable housing?_________________A cigarette is the perfect type of a perfect pleasure. It is exquisite, and it leaves one unsatisfied. What more can one want? ~Oscar Wilde, The Picture of Dorian Gray

Just wanted to point out that the major problem with housing in Hong Kong is physical lack of space. Hong Kong has an average population density of 6,544/km^2, compared to the US's paltry 34.2/km^2. Kowloon has a density of 43,033/km^2, compared to LA with a density of 3,176/km^2.

There is literally no more space to build.

If that is what you see as the "major problem" in the Hong Kong housing market I think we must have a different definition of that word. Personally I see people paying overprices to live in cages as a problem, while real-estate investors build luxury housing...but like I said we must see what constitutes a "major problem" quite differently.

Developers have little incentive to lose money by making comfortable, affordable housing because density (and thus demand) has driven up the price per square foot to ridiculous levels.

Those apartments sold out within 7 hours, at a price of almost $3000 (~HK22,000) per square foot. That's about 2.5x more than space in NYC. And it still sells out in hours.

Exactly. The market has no incentive not to let the poor live in shantytowns in one of the richest areas of the world. Forgive me, but I thought we were having a discussion about affordable housing?

So, how do you propose we drop the price per square foot of space in HK to a level at which affordable housing could be built?

Edit: Actually, how do you propose we comfortably fit 44,000 people into a square kilometre- which, by the way, works out to 240 sq. ft per person without any roads, hallways, walls, or any other kind of space-taking-up infrastructure.

Or is density still not the problem?_________________Whatever happened to the heroes?

I'm pretty sure the commute from Detroit to Seattle would be a killer. Wait, what were we comparing again?

Ah, right. Places where housing costs are going up and places where they're going down. If the reason is anything other than an imbalance of local housing quantity and people interested in buying/renting there, it's probably due to some form of market intervention.

As an aside, I try never to resort to fisking - I hate fisking with a deep and abiding passion, and if I see it, I usually stop reading - so sometimes you have to read my writing a little more closely to see where I address particular objections.

And it's not like there's no directly subsidized low-income housing in the US. Most new construction of low-income housing is subsidized. It accounts for roughly a quarter of all the low-income housing stock. Nor should it be any surprise that low-cost rentals are the old stock most likely to drop out of the market entirely when their creaky infrastructure requires more maintenance than they're worth. It's the old stuff on its last legs that's being let out cheap, and no one is making much of a profit on it, per that Harvard study somewhere in the citations. Those nice new apartments with higher rents developers are building now? Wait fifty years. See if a fair number of them haven't become relatively low-rent housing._________________The reward for a good life is a good life.